Pensions

Being busy with everyday life many of us, including myself, do not spend much time thinking how our lives will look like in 20 or 30 years. However, when I travel to the countries I work on, I see the challenges faced by the elderly, especially in rural areas. These challenges include poor access to social and health services, exclusion and simply loneliness.

The countries in Central Europe and the Baltics are ageing. As a result, the size of the working age population is shrinking, creating labor shortages which could potentially challenge future growth. Ageing is also putting government budgets under pressure from the rise in age-related spending on pensions and healthcare, and the shrinking base of tax contributors.

All of this is well known. Less appreciated, however, is the fact that in many countries there is a distinct geographical pattern to ageing. Sparsely populated rural areas are seeing an increasing share of elderly people, while urban areas still attract most of the young generation. The greying of the rural population creates a challenge for public policy as rural municipalities often have fewer resources with which to address the needs of their elderly population.

A typical Ugandan woman gives birth to an average of seven children, far higher than for other countries, including neighboring Kenya and Tanzania. There are many factors that push Ugandan woman to give birth to many children. For instance, low levels of schooling of women in Uganda often result in early marriage and early pregnancy. Inadequate access to family planning services, as well as cultural pressures that reward women for having many children, also contribute to Uganda’s high fertility rates. However, another important reason for Uganda’s high prolificacy is that children are a way of ensuring parents are taken care of after when they retire from active employment and can no longer fend for their livelihood. This incentive is particularly acute due to the fact that the Uganda pension system does not reach the majority of the country’s population. Today, although the elderly are still few in numbers (i.e., less than 5 percent of the population), only 2 percent of them are receiving a pension. Children are therefore perceived as a form of pension to many Ugandans because the majority of the population is not covered by any other system of protection.

Saving for old age is important in countries where longevity is increasing. Countries in Central Europe and the Baltics emerged from the economic transition of the 1990s recognizing that they needed to encourage their workforce to retire later and save more in order to be comfortable in old age. To this end, they modified their pay as you go pension systems which collects taxes from workers to pay retirees (the "first pillar") to create an additional or "second pillar" of individual pension accounts funded by taxes. As these second pillar pension accounts were the private property of individual workers, they were expected to encourage saving. Over time as these savings grew, it would be possible to reduce the pensions paid by the government from the first pillar without reducing the standard of living for pensioners who would be able to rely on complementary pensions from their private saving in the second pillar. Typically, a share of payroll tax receipts was redirected to finance individual pension saving accounts. This resulted in revenue shortfalls in pay as you go you pension schemes, and most governments raised additional debt to meet their obligations which was in turn held by the companies who were managing the pension savings on behalf of employees. However, since the economies were growing rapidly, fiscal deficits were generally kept manageable, easing concerns about additional debt.